Wednesday, July 30, 2014

Absent The T&T Central Bank There Would Be No $US "Shortage"

In a local free currency market, absent the Trinidad & Tobago Central Bank regardless of how "limited" the supply of US dollars, there would never be any "shortage" -where a would be purchaser cannot find $US available at the market price in $TT. 

For in a liberated currency market there is always enough supply available to satisfy demand at the market clearing exchange rate.

For example if there are severe declines in energy production and consequent declines in exports ($US earnings) there will be increasing scarcity of US dollars locally. This scarcity would be "rationed" voluntarily to the purchasers of US dollars by the uncoerced rise in the exchange rate, a rise sufficient to equalize supply and demand. 

If on the other hand, there is an improvement in energy production or T&T's export capacity improves the supply of US dollars increases, with US dollars becoming relatively less scarce, and the price of US dollars in TT dollars falls. Note that foreign exchange just as all goods and services are scarce, and the productive capacity of the T&T economy impacts its relative scarcity. 

Consider also that the demand for King Fish during the Lenten season is high however no one ever complains earnestly of a "King Fish shortage". They do not, because the price of fish is allowed to fluctuate freely without interference from the callous, politically motivated hand of government.

But suppose that the government, in its infinite wisdom, decrees for political reasons that King Fish can not be sold for more than $10/ pound. We can rest assured that, a severe King Fish shortage would promptly develop, accompanied by black markets, bribery, and all the rest of the paraphernalia of price control.

Similarly, if the foreign exchange market were unencumbered by the T&T Central Bank foreign exchange monopoly the response to dwindling $US supplies would be very simple: the exchange rate would rise. There would be complaints about the devaluation of the $TT, no doubt, but there would be no “shortage”, and no need to call for rationing. For being able to purchase $US 1.00 at $TT7 or $TT8 is better than being able to purchase $US 0.00 at $6.33 if you are not politically connected or personally affiliated with the privileged financial institutions. 

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